Revenue Motives and Trade Liberalization

Governments in more-developed economies partially compensate import-competing industries when world prices fall, i.e., they lean against the wind. Less-developed economies often liberalize in response to the same shock. We use a political-support maximization model with revenue motives to derive conditions under which a rational policymaker would respond to lower woild prices by reducing tariff protection for an import-competing industry. An initial tariff that exceeds the maximum revenue level proves necessary but not sufficient for politically optimal liberalization following a fall in the world price of the importable good.